Breakout

The Next Big Record Will Be Earnings, Says Colas

Breakout

The death defying run-up in the stock market the past five months has been nothing short of astonishing. Not only have the benchmark equity indexes gained more than 15% since mid-November, but they've hit their record highs amidst an endless storm of distress. While skeptics and bears have had ample fodder to poo-poo the market's progress, their arguments have grown increasingly stale with each passing day of gains. Their negativity eclipsed by a wave of prosperity, and yes, profits.

"We talk about the record high level (for stock indexes), but we are actually matching with a record high level in corporate earnings," says Nick Colas, chief market strategist at ConvergEx Group, in the attached video. He says if everything comes in as expected, S&P 500 companies will generate $25.45 per share in collective profits this quarter, and very likely more, if they can beat the street as they almost always do.

Related: What is Wall Street Expecting from Q1 Earnings Season?

But now, with yet another day of record highs at hand, the chorus of It Can't Last is already being touted in many circles where an overdue correction has been wrongly predicted for months. It's a scenario that Colas calls "a really interesting paradox" that has broken historical norms.

"What's very unusual about this particular new high in earnings is that it doesn't come along with a new high in economic activity around the world," he says, pointing to the unexpected and unspoken bull case behind equities. "If we can do record earnings in a relatively lousy economic environment around the world, what if the economy of the world ever improves?"

The answer, of course, is that corporate profits will be even higher than they are today, which in turn makes the record-high Dow Jones Industrial Average and S&P 500 look almost reasonably priced, or dare I say, cheap!

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